Is the Treasury overreaching?

By Brian Drew
Internet Editor,
FederalNewsRadio

The Obama administration on Thursday unveiled a sweeping overhaul of the financial system designed to impose greater regulation on major players like hedge funds. Treasury Secretary Timothy Geithner told lawmakers that the changes are needed to fix the flaws exposed by the current financial crisis, the worst to hit the country in seven decades.

Some lawmakers called it “an unprecedented grab at power” while others see it as a safety net.

John Berlau, Director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute, tells FederalNewsRadio that the plan would give the government very broad powers, and it would extend the very definition of a financial institution.

Under some statutes, like money laundering, jewelry stores and auto dealers are considered financial institutions. So, when you give the federal government the power to seize any business you’re raising a lot of concerns like eminent domain, property rights, and things like that.

Part of the proposal includes putting tougher regulations on institutions that are so large that they could cause risk to the entire system. However, what makes an institution a systemic risk is still not clearly defined, and Berlau says that the government defining an institution as a risk to the system brings its own problems.

Would you invest in a company that the government is going to take over and possibly wipe out shareholders the next day? A government takeover spreads its own risk, something that Tim Geithner seemed to recognize earlier, but it seems we may be going down that road again.

Part of the plan would also require greater cooperation with other financial regulatory agencies overseas. Berlau says cooperation is necessary, but some differences in regulation are still important.

He adds that it’s important for other countries to learn from each others success and failures.

“We should have a healthy degree of regulatory competition too,” he says, “just so there’s not a one size fits all model.”

He says that instead of a model where the government has to bailout a financial institution, there should be reform in other areas.

I think what they should work on is the bankruptcy codes, so that a company like Lehman Brothers could go bankrupt but without as much of a systemic risk. Or empowering bankruptcy courts to take into account something has a systemic risk.

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The administration, pushing for quick action on its reform agenda, sent Congress a 61-page bill dealing with the expanded powers to seize control of nonbank institutions late Wednesday.

The Associated Press contributed to this report.

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